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ANZ NZ Morning Brief

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Contributor:
Fuseworks Media
Fuseworks Media

OUTLOOK

CURRENCY: Markets will likely continue post-Payrolls moves, supporting NZD. The focus this week is mostly on Australasia with NZ, AU, and Chinese data overshadowed only by the ECB, where policy action is being debated.

RATES: NZ rates are expected to open broadly unchanged.

REVIEW

CURRENCY: Price action was telling on Friday, with stronger headline Payrolls not enough to strengthen USD. EUR continued to find support in fundamental data, while NZD was the winner on the day.

GLOBAL MARKETS: Activity was initially light in the London session, though further positive PMI prints from Germany, France and Italy helped Bunds give up some of their morning gains. The main action started when the stronger-than-expected US Payrolls report was released. The knee-jerk reaction of a stronger US dollar and higher yields was unsurprising, but the performance of the bond market was impressive. Long-dated yields rose only slightly and remained comfortably below their pre-GDP highs, with worsening Ukraine headlines partly to blame. The front end of the curve understandably underperformed, with 5y yields rising 7bps on the day. Increased Ukrainian tensions also contributed to falls in US and European equity indices. Safe haven demand supported in gold prices, with oil prices also up.

KEY THEMES AND VIEWS

US PAYROLLS - NO OBSTACLE TO TAPERING. April US Non-Farm Payrolls growth was well above expectations at 288k (218k expected), with upward revisions of 36k over the last two months to add to the feel-good factor. Three-month average payroll growth is running at 238k per month. At first glance the household survey also looked pretty good, with the unemployment rate falling from 6.7% to 6.3%. However, the participation rate fell sharply from 63.2% to 62.8% as emergency assistance for some long-term unemployed workers came to an end. Indeed, employment according to this survey actually fell by 73k in April. It appears the US labour market is strengthening, but perhaps not in a bulletproof fashion. Average hourly earnings rose a sluggish 1.9% y/y in April, slightly less than the 2.1% pace seen in March. ANZ expects wages growth to pick up gradually over 2014 and 2015. Overall, Friday’s labour market data offers no obstacle to the Federal Reserve’s plan to continue tapering their asset purchase program (we expect the tapering process to be finished by the end of October), with the first hike in the Fed Funds Rate to come in June 2015. The ongoing removal of the extraordinary stimulus will come as a significant headwind to the US - and global - economy, as asset prices are revalued to fundamentals. The next six months, a traditionally less liquid and more volatile time of year in any case, may prove to be a more exciting ride for financial markets than they have become accustomed to in recent years. The New Zealand currency, long interest rates, equity markets, and commodity prices would not be immune to a rise in volatility.

OTHER EVENTS AND QUOTES

- Barack Obama and Angela Merkel commented on the deteriorating situation in the Ukraine. "If, in fact, we see the disruptions and the destabilization continuing so severely that it impedes elections on May 25th, we will not have a choice but to move forward with additional, more severe sanctions." - Barack Obama.

NZD/USD: Pricing…

Pricing tells us a lot in markets: the fact that NZD/USD ended higher after a very strong headline payrolls report tells us everything. Details in the report belied the headline. The drop in the unemployment rate was due to a drop in participation, and the household report showed jobs lost, not gained. Wage growth slowed, although March was revised higher.

Expected range: 0.8600 - 0.8730

NZD/AUD: AU focus…

This week holds large event risk for this cross. Australia gives us the RBA, RBA SOMP, Retail sales, and employment. New Zealand has its employment survey, and China gives us April Trade. We expect this NZD to remain the strongest of the pair.

Expected range: 0.9280 - 0.9360

NZD/EUR: ECB week…

Fundamental support continues for Europe, after last week’s PMIs revealed further growth. The EU unemployment rate was also revised lower to 11.8% from 11.9%. However, the focus this week will be firmly on the ECB, where expectations for further policy action remain heightened.

Expected range: 0.6220 - 0.6280

NZD/JPY: At risk…

Yen looks to be at risk of strengthening. It is one of the market’s favourite trades and that positioning looks in danger. However, NZD remains a beacon of strength and should offset the yen.

Expected range: 88.00 - 89.00

NZD/GBP: Carry on…

Construction PMI was weaker than expected, but was still strong at 60.8. The UK is out for the May Bank holiday today, but expectations are for continued GBP strength.

Expected range: 0.5080 - 0.5120

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